This paper investigates the dynamic impact of natural resource discoveries on government debt sustainability. We use a ‘natural experiment’ framework in which the timing of discoveries is treated as an exogenous source of within-country variation. We combine data on government debt, fiscal stress and debt distress episodes on a large panel of countries over 1970-2012, with a global repository of giant oil, gas, and mineral discoveries. We find strong and robust evidence of a ‘fiscal presource curse’, i.e., natural resources can jeopardize fiscal sustainability even before ‘the first drop of oil is pumped’. Specifically, we find that giant discoveries, mostly of oil and gas, lead to permanently higher government debt and, eventually, debt distress episodes, specially in countries with weaker political institutions and governance. This evidence suggest that the curse can be mitigated and even prevented by pursuing prudent fiscal policies and borrowing strategies, strengthening fiscal governance, and implementing transparent and robust fiscal frameworks for resource management.
, including advanced economies and most middle income- and low-income countries (MICs and LICs). We also rely on multiple data sources for constructing comprehensive measures of fiscal stress and debtdistressepisodes as well as political institutions and governance.
To estimate the impact of giant discoveries on government debt, we employ a dynamic panel distributed lag model. This framework allows to explore the dynamic relationship between discoveries and debt trajectory over different time horizons. We treat the timing of discovery events as an exogenous source of
Mr. Carlo Cottarelli, Mr. Andrea F Presbitero, and Antonio Bassanetti
spanning the period from 1970 to 2014, shows that indeed debt dynamics is a robust predictor of debtdistressepisodes above and beyond the effect of debt levels. In particular, starting for example from a debt at 100 percent of GDP, we find that reducing the debt-to-GDP ratio by 10 percentage points over two years halves the probability of debt distress compared to an opposite scenario with a 10 percentage points increase in the debt ratio over the same period.
Identifying the conditions that facilitate regaining market access—once this has been lost—is also a very
International Monetary Fund. Asia and Pacific Dept
aligned with Vietnam’s medium-term objectives . Calibration of the debt ceiling is done in three steps.
Step 1: setting a maximum debt limit . The maximum debt limit is the level beyond which a debtdistressepisode is likely to occur with heightened probability (for example, default, restructuring, or large increases in sovereign spreads). In this exercise, the maximum debt limit for Vietnam is set to 80 percent of GDP, similar to the limit for emerging economies in the MAC DSA (70 percent of GDP), plus 10 percent to account for public guarantees that enter the gross
This paper estimates the determinants of external debt distress in low-income countries (LICs), disentangling the roles of institutions, shocks, and policies. The most prominent factors in raising the risk of debt distress are the weak protection of private property rights, adverse shocks to real non-oil commodity prices, and a high debt burden. Results also suggest that weak economic institutions tend to raise the probability of debt distress through persistently weak economic policies and high vulnerability to external shocks. The model enables a more granular analysis of debt sustainability in LICs and has a higher predictive power compared to the earlier scant literature.
Front Matter Page Institute for Capacity Development
III. Empirical Methodology
A. Identification of DebtDistressEpisodes
B. Explanatory Variables
C. Econometric Specification
A. Estimation Results: Benchmark Specifications
B. Goodness of Fit
C. The Threshold Probability Analysis
D. Marginal Effects of Explanatory Variables on the Probability of Debt Distress
V. Concluding Remarks
Appendix I. PPG External Debt Thresholds in the IMF-World Bank Debt
Board, or IMF management.
ABSTRACT : This paper investigates the dynamic impact of natural resource discoveries on government debt sustainability. We use a ‘natural experiment’ framework in which the timing of discoveries is treated as an exogenous source of within-country variation. We combine data on government debt, fiscal stress and debtdistressepisodes on a large panel of countries over 1970–2012, with a global repository of giant oil, gas, and mineral discoveries. We find strong and robust evidence of a ‘fiscal presource curse’, i.e., natural resources can
Spreads during the GFC (Median)
Figure 4. Commodity Prices and Equity Value of Commodity-Producing Firms
Figure 5. Dynamics Around DebtDistressEpisodes in EMs (Median)
Figure 6. Marginal Effects on Spreads (left to right): Λ 1 (τ), β(τ), γ(τ), β(τ)+γhis allows to understand whether assets ar(τ)
Figure 7. Counterfactual Asset Levels Conditional on Initial Gross Debt